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The importance of balancing loan portfolio growth and risk management

October 23, 2014
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U.S. banks are seeing low loss rates on CRE and construction loans relative to the past six years, according to Forbes. As a result, many are seeking growth in these areas, and others, as the recent financial crisis falls into the more distant past. But how can this growth be managed appropriately?

CEIS Review, a New York-based bank consulting firm, highlights the shift in a recent article. Community banks certainly want to remain conservative with risks and follow regulations. But shareholders also expect profitability and growth, while keeping costs, especially those related to regulatory compliance, down.

The regulatory compliance aspect is critical, CEIS notes. “As we witnessed with the not so distant crisis, banks that were lax with their credit standards while booking unprecedented new business ultimately paid the cost.”

Banks understand the need to regularly specify and quantify portfolio risk, and remain cognizant of the impact new loan commitments have on the balance sheet. But CEIS points out that the lending staff often doesn’t have the “time nor the resources available to properly and effectively perform this,” which ultimately results in “sporadic and irregular delivery of portfolio risk assessment reports.”


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Senior management and the Board need clear and concise reporting that shows:

• Portfolio trends and characteristics
• Peer comparisons
• Current and future industry trends and concerns

When these reports aren’t provided, the bank is at risk of suffering loan portfolio quality problems that aren’t easily remedied. Given existing constraints in resources, banks have the opportunity to outsource loan review to third-party experts. Taking control of the portfolio can help reduce unexpected portfolio changes, such as:

• Higher reserves
• Increases in past dues
• Growing borrower exception reports and/or non-accrual lists

Despite the resurgence of commercial lending, CEIS stresses that it doesn’t mean “lenders should start accepting loan applications that don’t meet standards just to boost market growth.” Growth plans should only be determined after gaining a complete understanding of current, historical and future commercial lending plans, along with the associated implications. In addition, risk analyses should be performed regularly.

Banks who seek outside expertise can benefit from objective reporting and recommendations on the state of their commercial loan portfolio. But whether outsourced or not, senior management needs to have “high quality, timely portfolio information” so they can make better loan decisions over time.

According to Abrigo’s Tim McPeak, there are three keys to effective loan review. First, independence and objectivity are critical. This can be accomplished via a third-party, or an appropriate organizational structure that features personnel independent of the lending function. Second, there must be long-term commitment from senior management to the loan review program, ensuring it is conducted properly and results are used effectively. Third, a defined scope of review should be established in advance, detailing what should be included. Examples include the loan sample, consumer loan portfolio and documentation review.

CEIS adds that instilling a strong loan review program provides the basis for “smart lending, strategy and safe market growth.”

To learn more, read the full article from CEIS Review.

About the Author


Raleigh, N.C.-based Sageworks, a leading provider of lending, credit risk, and portfolio risk software that enables banks and credit unions to efficiently grow and improve the borrower experience, was founded in 1998. Using its platform, Sageworks analyzed over 11.5 million loans, aggregated the corresponding loan data, and created the largest

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Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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